How To Budget With Irregular Income
Budgeting is not the dirty word you think it is. When you’re living on an inconsistent income typical of freelance or self-employed careers, it becomes the make-or-break tool for coming out ahead at the end of the year.
As veteran freelancers can tell you, it takes time to create a financial system that can keep your checking account steady amid fluctuating contracts and unique tax situations. To do that, you’ll need to budget wisely, pay your quarterly taxes each month, and seek out clients and gigs that have the potential to create steady income.
1- Budget Wisely
If you find yourself in the early stages of your self-employed career, income tends to be more of an erratic, occasional thunderstorm rather than a steady soak.
Take a few hours to review your spending habits and set a hard budget that allots enough money in all the important categories without allowing unnecessary spending. Add up your per-category totals: Is your modest budget possible on your fluctuating income? Do you need to be intentional about winning more gigs in order to maintain a reasonable standard of living?
This type of financial audit can bring up some uncomfortable decisions, but remember—these are only seasonal. As you create this budget, don’t forget to include monthly tax payments.
If do you use credit cards to help you get through the slow periods, be smart about it. Do your research and choose a credit card with a low APR and valuable perks like cash-back and rewards. And always pay off your balance as soon as you can.
2 – Pay Your Quarterly Taxes Every Month
Quarterly taxes tend to be an annoyance to seasoned and new self-employed workers. Thankfully, taxpayers aren’t limited to written checks anymore. The IRS’ Payments page allows you to make estimated tax payments whenever you want.
Take a few moments to review the previous year’s tax return and calculate your tax rate. Use that as your guide for how much should be taken out of each month’s earnings. Then, head to the IRS’ website and make payments through their Payments page. The entire process takes less than five minutes.
Paying taxes every three months is also a viable option, but doing so each month builds discipline and ensures that tax money isn’t spent on other things.
3- Identify Clients or Jobs That Provide Consistent Income
The most difficult thing you can experience as a freelancer or self-employed worker is the pain of losing a client that either has run out of money, isn’t getting the results they want or closes their business altogether.
Out of those frustrating moments, though, 1099 workers can discover that the crux of a self-employed or freelance career is the anchor client. There isn’t a specific protocol or checklist to follow in order to identify these clients. It’s more of an instinctual read—learn about them over time and there should be a sense either way if the position is tenuous or solid.
In the meantime, work hard to keep enough clients and one-time gigs to sustain an income that can meet your budget and, hopefully, exceed it enough to keep you out of debt.
The Bottom Line: It Takes Discipline
Each of these three facets of personal finance take more than intention—they take hard work. If you don’t already have one, creating a budget can be painful, but it’s worth the short-term sting.
Paying your taxes every month will take some getting used to, but the consistency keeps your finances steady and your taxes straight.
Searching out reliable clients takes work, time, and instinct, but the rewards of a steady 30 to 40-hour contract are clear: a more stable budget and peace of mind.
Learn more about the tax benefits of college savings accounts like 529 plans and Coverdell ESAs with the experts at H&R Block.